Real Estate Investment Strategies – Options
Options are always a nice thing to have, regardless of your situation. In real estate, the option contract can be used for a number of different scenarios, I am going to use this space to focus on just one: let’s call them the “tweener sellers.”
I consider the tweener type of seller to be somewhere between wholesale and retail, but leaning a bit more towards the retail side. The seller lacks the personal/financial distress that drives the immediate resolution necessity of a direct purchase, while they may also find themselves reluctant to list the property with an agent – or may have already done so without any luck.
This was the type of scenario that left me scratching my head in the past, but today, if I am unable to purchase directly or list the property I simply reach into my creative solutions bag and introduce the option agreement to the seller.
What is an option? The option contract is simply an agreement you have in place with the seller that specifies the terms in which you may exercise your option to purchase the property. On the other hand, you may also choose not to exercise your option to purchase the property and the contract will expire.
How does it work? As with any contract, you can make the terms of the agreement as complex or as simple as you would like; it all depends on the situation. My philosophy with the option contract is to keep the agreement as simple and straight forward as possible, in fact, the agreement I use is only one page.
Let’s take a look at the typical terms of the Option contract I like to use:
The Length: I don’t look to “tie up” the property for an extended period of time – I like 2-4 weeks.
If you are getting the seller’s best off-MLS price, do you really need more than a month?
The Price: This needs to be realistic. At the very least, the price you need to obtain from the seller needs to be market price, minus agent commission, “and then some.” This last part – ‘and then some”- is an indicator of your negotiation skills and the seller’s motivation to sell, the lower the price, the better your chances of finding a buyer. It doesn’t make any sense to option the property if the seller cannot do better than market value. If that happens to be the case, then list the property or learn the mantra every successful real estate investor uses: NEXT…..
Seller’s Rights: Under this agreement, the seller can sell the property on their own and cancel or extend the agreement anytime they like. If the contract period runs out and the seller does want to extend, I look for a significant drop in price.
Marketing: My target for this type of property is a retail buyer! I do not run this property by my investor list and I would suggest you don’t either if you want any of your investors to continue to open your email. Given the high percentage (87%+) of home buyers that use the internet to search for property, I post the listing to a number of different high traffic websites with a compelling headline/picture that will draw the attention of a ready, willing, and able buyer (read: pre-approved) seeking to find a good bargain. I then use blogs, video, and social networking sites to drive traffic to the property listing.
And that is all I do: no newspaper/radio/television ads, signs, phone calls, voice, or email blasts. In my experience listing REO’s, the lenders certainly got one thing right, price the property correctly and it will sell. If you insist on over-pricing the property, you will continue to own that property regardless of where you choose to advertise. Put a well-priced property in front of a large pool of willing buyers and you have yourself a great wealth building formula.
When I field calls on the property, I give the potential buyer a pretty good grilling. Why? Because I don’t want to drop what I am doing and interrupt the seller’s life in order to meet a tire kicker at the property!! Naturally, you’ll need to do this a few times – as I have – in order to appreciate how vigilant you must be about pre-screening your buyers.
Once the property is seen and the buyer moves forward with the seller to the contract stage, I get paid an assignment fee: I am assigning the terms of my option contract I have with the seller to the end buyer. Given the amount of work I do in this type of transaction (next to none), the fee isn’t outrageous. I look to gather all of my fee up front from the end buyer and exit the transaction as soon as I can: my piece is done, buyer and seller have been brought together. There are times when this isn’t the case – complications, larger numbers, difficult buyers/sellers…If necessary, I gather as much of my fee up front, make it non-refundable after home inspection, and collect the remainder at closing.
Oh yeah, so what happens if you have yourself a pre-approved buyer, you meet them at the property, and it turns out they don’t want the property? Hmmm, I wonder if I can find them another property that they may like….if you’re not an agent, do you think any one on your investor’s list might be interested in showing your buyer some of their properties?
This is another example of a win/win/win transaction: the seller gets a good price in a timely manner, the buyer gets a property at a bargain price, and I get paid an assignment fee for bringing the two parties together.
Kevin Sullivan is an active real estate investor and owner of Premiere Asset Solutions.
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